Essay Interest Rates And The Supply Of Money

914 Words Aug 2nd, 2015 4 Pages
1.Monetary policy refers to the decisions made about interest rates and the supply of money. In New Zealand the Reserve bank is independently responsible for monetary policy to prevent usage and sway from political purposes. Price stability prevents good or services from getting rapidly more expensive (inflation) or rapidly decreasing in value (deflation) .Price stability is currently defined as “keeping the rate of inflation between 1-3 percent on average over the median term.” This is called the Policy targets agreement which is set by the minister of finance and the Governor of the reserve bank. This is achieved mainly by the official cash rate (OCR) which is set by the Reserve Bank and reviewed eight times per year and altered four times per year. The OCR influences the cost of borrowing money from banks in New Zealand and therefore the OCR can be used to influence New Zealand’s inflation. Currently the inflation rate of New Zealand is at 0.3 % , well below what is considered advantages. As inflation is too low the Reserve Bank has recently lowered the OCR on the 23rd of july by 0.25, decreasing the OCR from 3.25% to 3%. Decreasing interest rates is an attempt to increase demand by giving households and businesses more disposable income to spend on goods and services thus increasing economic growth ( graph 2 Y->Y’) and aggregate demand (AD-> AD’)which can have a byproduct of inflation.In addition in the medium term this should increase investment spending as it is…

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